Is an End to the Cannabis Banking Crisis Near?

In April, the California State Senate Governance and Finance Committee approved bill SB 930, which seeks to create a state-wide banking framework for the cannabis industry. The legislation was originally introduced by Sen. Bob Hertzberg (D-Van Nuys) in January in response to one of the biggest obstacles facing cannabis business operators – the lack of access to traditional banking options.

“Proposition 64 allowed legalized recreational marijuana in the state, but did nothing to address the lack of financial services available to this industry,” said Sen. Hertzberg when the bill was introduced. “These businesses handle significant economic activity, yet they are forced to operate under the table and with little government oversight, as if they’re a black-market operation. This solution is how we will integrate these businesses into the fabric of the California economy.”

To date, the vast majority of cannabis-related businesses across the country are not able to have traditional banking relationships. As a result, all business operations – including payroll, rent/lease payments, and complex tax payments – must be conducted with cash. There are some exceptions to this rule, as banks and credit unions in Colorado, and various banks in other markets, are knowingly (and in some cases unknowingly) providing banking services for the cannabis industry.

Why Can’t Cannabis Businesses Use Banks?

The simple answer is that despite the wave of states adopting legalized and responsible cannabis programs (medical and adult-use), cannabis remains a Schedule I controlled substance under federal law. Thereby, any federally-insured financial institution that has a relationship with a cannabis business runs the risk of potential federal prosecution for a variety of charges, including money laundering.

As a result, cannabis business are forced to collect and process immense amounts of cash. This money must be tracked and organized, safely stored (often onsite), and then transported to meet the various financial demands of an operating business. The presence of large amounts of cash has proven to be a magnet for criminal activity, which occasionally devolves into violence, creating a safety hazard for businesses, state and regulatory authorities, and the general public.

How does SB 930 Provide a Solution to the Cannabis Cash Crisis?

If enacted into law, the bill would allow for the development of a unique class of state-chartered cannabis limited charter banks (CLCBs) and cannabis limited charter credit unions (CLCCUs). These entities will have the ability to process deposits, withdrawals and other transactions with legally licensed cannabis businesses. Regulated by the Department of Business Oversight, SB 930 would allow these financial institutions to issue “special purpose checks” that can be used for the following:

To pay fees or taxes to the state or local jurisdiction,

To pay rent on property that is associated with the cannabis business,

To pay vendors for expenses related to goods and services associated with the cannabis business, or

To purchase bonds or interest-bearing notes or warrants backed by the state, or bonds or warrants of local jurisdictions.

How Will These Banks and Credit Unions be Able to Operate?

SB 930 proposes a special category of financial institutions that are completely walled off from the traditional banking sector. The CLCBs and CLCCUs will be able to form networks and establish branches throughout the state and provide two types of services: accepting and holding deposits, as well as issuing the special purpose checks.

The success of the plan hinges on the ready acceptance of the special purpose checks, which will be used specifically to pay for certain goods and services related to the operation of cannabis businesses, and to pay various taxes.

Giving cannabis businesses the ability write a check, rather than carry around briefcases full of cash, is intended to take a significant amount of cash off the street, mitigating some of the public safety risks.

Where is SB 930 Today?

While the news that SB 930 was approved by a second Senate committee is a good sign for cannabis industry operators and advocate, the bill still has a long way to go before being signed into law. Previously, SB 930 was approved by the Senate Banking and Financial Institutions Committee. It now moves on to the Senate Appropriations Committee, which will have to pass it before it receives a vote from the full Senate.

The Potential Impact of SB 930

SB 930 represents the most comprehensive legislative attempt at enabling a banking access for the cannabis industry. If the bill passes and is successfully implemented, it will not only alter the landscape of the cannabis industry in California, it will serve as an example for the rest of the nation, and perhaps the world.

Not only does SB 930 address many of the public safety concerns detailed previously, but it also enables greater operational and financial efficiency for cannabis operations. As cannabis businesses grow and evolve into sophisticated entities, the ability to conduct basic transactions – like payroll, rent, and tax payments – through a financial institution, will help many businesses achieve sustainable, transparent and optimized accounting and business practices.

The advantages are significant for state and local governments and regulatory authorities as well. Access to financial institutions will also make tracking and receiving tax payments easier, and safer. Plus, the levels of data created will allow for deep analysis of industry trends.

We at MGO will be tracking the progress of SB 930 carefully, as it will have a significant impact on the cannabis industry as a whole. For more information or to schedule a consultation, contact us here.

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This material is for informational purposes only and should not be construed as financial or legal advice. Please seek guidance specific to your organization from qualified advisers in your jurisdiction.